IMF Renews Call to Ease Austerity
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IMF Renews Call to Ease Austerity – WSJ. com By THOMAS CATAN and IAN TALLEY WASHINGTON—Seeking to keep a fragile global recovery on track, the International Monetary Fund on Tuesday called on countries that can afford it —including the U.S. and Britain—to slow the pace of their austerity measures. The fund warned that "overly strong" belt-tightening in the U.S. will slow growth this year. Across-the-board government spending cuts, known as the sequester, were the "wrong way" to shrink the budget deficit, it said in its semiannual report on economic growth. Those cuts should be replaced by more targeted reductions that would take effect further do wn the road— after the economy gains more st rength, the report said. The U.K. government, which in 2010 embarked on a closely watched effort to escape its slump through tax increases and spending cuts, also should consider easing up on its austerity drive amid a weak recovery there, it said. And it warned euro-area policy makers against focusing too much on hitting tough deficit targets, saying they risked further deepening their downturn.
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IMF Renews Call to Ease Austerity – WSJ. com
By THOMAS CATAN and IAN TALLEY
WASHINGTON—Seeking to keep a fragile globalrecovery on track, the International Monetary Fund onTuesday called on countries that can afford it—includingthe U.S. and Britain—to slow the pace of their austeritymeasures.
The fund warned that "overly strong" belt-tightening in theU.S. will slow growth this year. Across-the-boardgovernment spending cuts, known as the sequester,were the "wrong way" to shrink the budget deficit, it saidin its semiannual report on economic growth.
Those cuts should be replaced by more targeted
reductions that would take effect further down the road—
after the economy gains more strength, the report said.
The U.K. government, which in 2010 embarked on aclosely watched effort to escape its slump through taxincreases and spending cuts, also should consider easing up on its austerity drive amid a weak recoverythere, it said.
And it warned euro-area policy makers against focusingtoo much on hitting tough deficit targets, saying theyrisked further deepening their downturn.
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"Fiscal adjustment needs to proceed gradually, buildingon measures that limit damage to demand in the shortterm," the IMF said.
The IMF also called on countries like Germany that havetraditionally relied on exports for growth to lift spending tostimulate their economies and, hopefully, imports from itsstruggling neighbors.
"There is a need for higher demand" in countries with bigtrade surpluses, IMF Managing Director ChristineLagarde said in a speech last week. "For countries inNorthern Europe, like Germany, it means doing more toboost investment."The IMF's message chimes with that of the Obamaadministration and highlights a continuing gulf betweenleaders of major economies over how best to recover from the crisis that began five years ago.
Many European governments are cutting governmentspending, raising taxes and pursuing other measures toshrink budget deficits that ballooned after the financialcrisis.
Some, such as Greece and Portugal, have no choiceunder the terms of international bailouts. Others, such asthe U.K. and Germany, say they must control spending if
they want to keep their borrowing costs low, and arguethat the approach will lead to stronger growth in the longrun.
The Obama administration and IMF have warned theefforts could be self-defeating by restraining growth,
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which could widen deficits and make their debts harder topay.
The outcome matters to the U.S. because its economy is
closely linked to Europe's and could be hurt if the eurozone's financial turmoil escalates. The White House isseeking to swap the sequester with more backloadedspending cuts and tax increases at home, while pressingEuropean policy makers to slow the pace of their austerity programs and generate stronger growth.
Germany has so far resisted the pressure. "Nobody inEurope sees this contradiction between fiscal-policyconsolidation and growth," the German finance minister,Wolfgang Schäuble, said earlier this month.
The U.K. government has also vowed to stay the course,saying that conditions for growth can only be restored by
repairing the country's finances.On Tuesday, a U.K. Treasury spokesman pointed outthat the IMF forecasts better growth for the U.K. economythis year, at 0.7%, than either France, where theeconomy is forecast to contract, or Germany, where it isexpected to grow just 0.6%.
That debate will continue to play out in Washington thisweek as global finance ministers arrive for the crisislender's annual meetings, amid renewed worries aboutgrowth in several key regions.
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New figures this week showed that China's economy hadslowed unexpectedly in the first three months of the year,sparking concerns that a recovery that began in the
second half of last year could be running out of steam.U.S. consumers are showing fresh caution by pullingback on spending, new data showed Friday, raisingworries that the economy could be headed for yetanother spring slowdown.
Meanwhile, growth in the euro area is hovering close tozero and the IMF forecast that the region's economywould shrink again in 2013. The U.K. is also at risk of falling into a "triple-dip" recession as its austerity drivecontinues to bite.
The IMF still believes that the U.S., Japan and Europeneed to bring their budget deficits under control over thelonger-term, saying they are not sustainable.
But it also says countries such as the U.K, with lowborrowing costs, should adjust the timing and pace of their efforts to avoid killing growth.
The IMF's latest World Economic Outlook report showshow much its policy prescriptions have shifted in recentyears.
The fund came under heavy criticism during financialcrises in Asia and Latin America for emphasizing painfulfiscal adjustment programs as the solution to debtproblems, which critics said made sick economies evenworse. Now, the fund says it underestimated the effect
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that government spending has on growth, particularlyduring a crisis.
Underlining the growth worries, the IMF cut its economic
forecasts for virtually every major region in 2013. It seesthe euro-zone economy contracting by 0.3% in 2013, 0.2percentage points more than it did in January.
That was due to relatively large markdowns in France aswell as in Italy, which has been unable to form agovernment since elections in February, and where theeconomy is now forecast to shrink by 1.5%.
The French economy was forecast to shrink by 0.1% in2013 after a year of no-growth in 2012. The IMF's latestforecast was 0.4 percentage points lower than in Januaryfor both countries, a relatively large downgrade in justthree months.
More worrying, there are also signs that the slumping
economies in countries like Spain—
forecast to sink byanother 1.6%—are starting to weigh heavily on the larger economies in the region.
"This slump in Europe is worrisome," Oliver Blanchard,the IMF's chief economist, said. "Now the question is howto get the recovery going in Europe."
The IMF was relatively upbeat about the strength of theU.S. recovery, but still sees growth in 2013 slowing to1.9%, or 0.2 percentage points lower than it did in its lastprediction back in January.
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The main change since then was that the sequester tookeffect. Unless it is replaced with less immediate cuts, thesequester would subtract around half a percentage point
from this year's growth rate, the IMF predicted."There should be both less and better fiscal consolidationnow and a commitment to more fiscal consolidation in thefuture," it said.
One exception to the IMF's glum outlook was Japan,where the new government is using easy money policiesand spending increases in a push to climb out of years of anemic growth. The IMF added nearly a half-percentagepoint of growth to the country's outlook for 2013 from itsprevious assessment, boosting it to 1.6%.
The program has lifted growth expectations but also cutthe value of the yen, leading some to worry that countriesseeking to juice their exports could get involved in tit-for-
tat devaluations.On Tuesday, the IMF largely dismissed such concerns.
"Complaints about competitive exchange ratedepreciations appear overblown," the fund said, evenwhile it noted that the yen has fallen 20% in real effectiveterms since mid-2012.
Much of the Japanese currency's decline has occurredthis year, under the new government of Prime Minister Shinzo Abe. The IMF's pronouncement is likely toprovide a great relief to his administration, following ablunt warning from the U.S. Treasury Department last
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week that it will continue to press Japan "to refrain fromcompetitive devaluation."
—Ainsley Thomson contributed to this article.
Write to Thomas Catan at [email protected] andIan Talley [email protected]
A version of this article appeared April 17, 2013, on page A9 in the
U.S. edition of The Wall Street Journal, with the headline: IMF
Renews Push Against Austerity.
